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Consumer staples giant Procter & Gamble (NYSE: PG) made big news recently when it announced it will sell several dozen brands to Coty Inc. (NYSE: COTY) for a cool $12.5 billion.
Investors have been pressuring P&G to do something big for quite some time. The company has looked more like a lumbering giant than a world-class blue chip in recent months.
P&G stock is down 10% year-to-date, and the company’s sales and profits are in decline for a number of reasons. International performance is getting crushed by the rising U.S. dollar. And, in North America, P&G is getting undercut by discounted competitors offering cheaper products than P&G’s premium-priced brands.
With all this in mind, it was obvious P&G needed to do something. But in order for P&G to really move the needle, it needed to do something big. After all, P&G is a massive company, worth $222 billion in market capitalization.
P&G did just that. Here’s why its huge deal with Coty makes great strategic sense.
The Mechanics of the Deal
Over the past several quarters, P&G has looked like a bloated company that operated too many low-growth brands. Total sales declined 4% over the first nine months of the current fiscal year, while operating profit was down 6% for the same period. This is why a change was necessary.
P&G will sell 43 beauty brands to Coty, which makes products like Marc Jacobs and Calvin Klein fragrances, for more than $12 billion. Coty will take over the fragrance business with brands like Dolce & Gabbana, Gucci and Hugo Boss. Also included in the sale are P&G’s cosmetics lines including Cover Girl and Max Factor, and the Wella hair-care business.
The deal makes a lot of sense for P&G. The main reason is because the businesses in question are in decline. The beauty, hair, and personal care segment is one of the largest at P&G, representing 23% of total sales for the most recent quarter.
But this segment saw revenue fall 11% last quarter, year-over-year. In fact, the beauty, hair, and personal care segment was P&G’s only business to see a decline in organic sales last quarter.
P&G’s Much-Needed Makeover
P&G needs to re-focus on its higher-growth brands. The company can now do this much more effectively, first by getting rid of businesses that aren’t growing. This was the motive last year when P&G sold its Duracell business to Berkshire Hathaway (NYSE: BRK-B) for $4.7 billion.
Put simply, P&G operates too many brands. It needs to reduce the number of brands so that it can spend more time investing in and developing the brands that are actually growing. This is why P&G has been on a multi-year journey to trim its product portfolio.
Since 2008, P&G has divested or spun off nine different categories, not including the most recent deal with Coty. Those categories include bleach, coffee, batteries, pharmaceuticals and more.
Going forward, P&G can use its tremendous scale to really maximize the potential of its stronger brands. There will likely be more divestments in the future. In all, P&G plans to exit about 100 brands before its portfolio transformation is complete, and management has stated these businesses were collectively declining at about a low single-digit rate for the past three years.
Once P&G’s makeover is complete, the company envisions operating roughly 65 brands across just seven categories, with a geographic focus on higher-growth emerging markets.
P&G can also use a portion of the proceeds to accelerate its stock buyback program. P&G shares have performed poorly this year as its earnings growth has slowed down, and opportunistically buying back more shares at these low levels will boost EPS growth even more.
As a result, P&G’s massive deal with Coty makes sense on several levels. Investors should applaud the company for this savvy deal.
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